Wall Street slumps to a 13-month low

US stocks slumped in heavy volume to a 13-month low yesterday as investors dumped bank shares on fears that Greece's worsening financial crisis could cause a large European lender to fail.

Investors pegged losses to the sharp fall in Franco-Belgian financial group Dexia, which fell 10 per cent after a Moody's warning about its liquidity due to concerns about exposure to Greece.

Markets have feared European officials will be unable to prevent Greece’s fiscal crisis from turning into a global banking crisis. Greece said it will miss its deficit targets this year and next, which could limit the country’s ability to receive more aid.

“Most investors fear that markets in Europe are going to run well ahead of politicians that are not going to be able to get any kind of reasonable solution,” said Jack de Gan, chief investment officer at Harbor Advisory Corp in Portsmouth, New Hampshire.

US banks have become a target for speculators. Morgan Stanley closed at its lowest since December 2008 and its cost to insure its debt has jumped as other banks hedge counterparty exposures and traders bet on the situation worsening.

The recession that wiped 12 years of gains off the S&P 500 was caused in part by a credit crisis.

“We are going to have a disorderly default in Greece and there could be another banking crisis in Europe as they are undercapitalised and loaded with (sovereign) debt,” De Gan said.

Morgan Stanley has been the most volatile bank in recent weeks, with the cost to insure its debt rising to November 2008 levels, according to Markit data.

Morgan Stanley shares fell 7.6 per cent to $12.47 and the S&P financial sector was down 4.5 per cent.

The market’s focus on Morgan Stanley stems from a perception about their reliance on short-term funding, said Harbor Advisory’s De Gan. “They rely on the credit markets and that was the downfall of Lehman and other institutions three years ago,” he said.

The Dow Jones industrial average closed down 2.36 per cent to 10,655.30. The S&P 500 fell 2.85 per cent to 1,099.23, its lowest level since September 2010. The Nasdaq Composite dropped 3.29 per cent, to 2,335.83.

A stronger-than-expected reading in a gauge of US manufacturing briefly lifted Wall Street stocks, but global manufacturing shrank for the first time in over two years in September, reinforcing fears of another recession.